Users of the financial statements of nonprofit organizations are sometimes confused as to the true financial position and performance, and how that translates into the achievement of a mission. Nonprofit net asset reporting has always been one of the primary causes of that confusion, particularly to the reader more familiar with standard business focused financial statements.
In April 2015, the Financial Accounting Standards Board (FASB), issued an exposure draft of an Accounting Standards Update (Standard) that would potentially redesign the presentation of financial statements for all types of nonprofits. This “refresh”. also includes two changes in recognition standards, related to donor-imposed capital restrictions and underwater endowments losses net asset classification. However, in general, the current methodology in which nonprofits recognize revenues or expenses will not change, though the presentation will indeed be different while also permitting some reporting customization. The FASB has now split the project into two workstreams. One; to reconsider issues that are independent of other FASB projects that are current, inprocess, or contemplated, and are changes that might be finalized on a fast-track. The other; to look at changes that are likely to require a longer time and perhaps greater effort to implement.
The most fundamental proposed modification in the near-term workstream would be the change to the current net asset reporting scheme, which eliminates the distinction between temporarily restricted and permanently restricted net assets. The current three net asset classes would become only two net asset classes, differentiated by being with or without donor-imposed restrictions. Temporary versus permanent restrictions become less important, and are replaced by an emphasis on differences in the type of restriction and the criteria for the net assets to be utilized. This simpler presentation of restricted net assets will go some way to reducing complexity on the face of the statements of financial position and activities and help the reader understand the net asset position.
Another helpful clarification will be the revised naming scheme to define that restrictions are only those that are donor imposed. The new label of “net assets with donor restrictions”is simpler than the old “temporarily restricted” and “permanently restricted”. The nature and amounts of donor-imposed restrictions pertaining to their net assets and the conditions required by to satisfy such restrictions, will still all require disclosure. Board-designated net assets without donor restrictions, including those earmarked for specific future programmatic expenditures, will also be a required disclosure, which generally goes beyond current requirements.
Another proposed change is that a deficit related to an underwater endowment account will be charged to net assets with donor restrictions, rather than reducing unrestricted net assets. Currently, when the fair value of an individual donor-restricted endowment fund is less than the original donated amount required to be maintained by the donor or by law, the resultant loss is charged to unrestricted net assets. Disclosures will be required of the board’s policy on spending from underwater endowment funds, the original gift amount or level required by law/donor stipulations to be maintained, as well as fair value.
Investment return and expenses are also considered under the Net Assets Classification section of the near-term workstream. This proposal would require a net presentation of external and direct internal investment expenses against investment return on the statement of activities. It would not be required to disclose the components of investment return (loss) and the amount of investment expenses and there would no longer be the option to report investment expenses within total expenses.
Overall, these proposals to Net Assets Classification is likely to be a step towards simplifying nonprofit financial statements. It will be of great interest which proposals survive the comments period and become a new FASB standard, joined by other successfully adopted workstream recommendations.